It is rumored that iQiyi may use backdoor methods to land on A-shares in 2017, which is officially denied

According to the iQiyi management buyout project plan exclusively learned by Sina Technology, iQiyi plans to be privatized through management buyout, dismantle the original VIE structure, and launch a backdoor listing in 2017.

In February this year, Baidu issued an announcement stating that Baidu Chairman and CEO Robin Li and iQiyi CEO Gong Yu had acquired Baidu's 80.5% stake in iQiyi at a valuation of 2.8 billion yuan. If the transaction is successful, iQiyi will be separated from Baidu's assets and indirectly privatized.

If it had not been for the unexpected abortion of the Strategic Emerging Board, iQiyi's MBO(Management Buyout) plan would not have been unsavvy. First, it would have solved the burden problem in Baidu's financial report. Second, it could have taken advantage of the split of the VIE architecture and returned to China to go public. Third, under the money-burning model, it would have been possible to go to the open market to replenish ammunition. This is the "wishful thinking" of Li Yanhong and Gong Yu.

However, the strategic emerging board unexpectedly aborted. In March 2016, the Fourth Session of the National People's Congress deleted the content of "establishing a strategic industry emerging board" in the revision of the draft outline of the "13th Five-Year Plan", which meant that Baidu Chairman Robin Li and iQiyi founder Gong Yu's wishful thinking miscalculated, and iQiyi will not be able to consider a plan to list on the strategic emerging board for at least the next five years.

This also means that Li Yanhong and Gong Yu, who have already launched the iQiyi MBO plan, will only bear the losses of iQiyi in their personal capacity. In April this year, Sina Technology pointed out in an analysis report "Privatization of iQiyi may cause Li Yanhong and Gong Yu to lose 5.77 million yuan a day" that a daily loss of as high as 5.77 million yuan will inevitably accelerate Li Yanhong and Gong Yu's progress on iQiyi MBO project.

It plans to go public on a shell A-share market one year later

. Now, according to the iQiyi management buyout project plan that Sina Technology has exclusive knowledge of, iQiyi plans to go private through a management buyout, dismantle the original VIE structure, and launch a shell market in 2017. In this project, the management led by Yanhong Li and Gong Yu will establish a special fund of 1.5 billion yuan, with a duration of 4 years and can be extended for one year, specifically for the iQiyi MBO project. According to iQiyi's project plan, it will land in A shares through backdoor borrowing in 2017.

Iqiyi Privatization and Reorganization Plan

According to the project plan, Iqiyi will undergo privatization, dismantle the original VIE structure and finally achieve domestic listing. The original VIE(realizable interest entity) equity will be transferred to the domestic SPV(special purpose vehicle/company), and the control relationship of WFOE(foreign investment/sole enterprise) over the domestic entity to be listed will be terminated, and the buyer's consortium will purchase the equity of WFOE owned by Cayman overseas entities through cross-border payment. Yanhong Li, Gong Yu's management, investors and other old shareholders will contribute in RMB to form the buyer's consortium.

The main core clause

project plan shows that in mid-2016, a buyer's consortium will acquire VIE and WFOE in parallel. The buyer's consortium will make internal adjustments such as capital increase and entrusted loans to SPV, VIE, and WFOE to ensure the company's financial stability in connection with the capital market. Among them, investors jointly contributed 15.42 billion yuan, including 970 million yuan in loans provided to Gong Yu and his management.

After completing the privatization, iQiyi plans to use shell listed companies to purchase assets and raise funds to realize iQiyi's A-shares in 2017. The project plan also mentioned that by the end of 2020, investors will achieve a cumulative 3.3x through A-share withdrawals, and the internal rate of return will reach 27%. At this time, the market value of the listed company will reach 110 billion yuan.

At

present, more and more Chinese stocks and Internet companies with VIE structures have chosen to return to A-share listings. However, compared with the Chinese stocks that have been listed overseas, as an unlisted company and Baidu owns 80% of iQiyi, the process of privatization and dismantling of the VIE structure is relatively simple. At the same time, it may take less time.

At the 2015 World Internet Conference, Gong Yu once said that iQiyi was planning to dismantle the VIE structure and prepare to go public in China. In fact, iQiyi previously tried to list in the United States, but ultimately failed. The continuous burning pattern of video websites and the difficulty in making profits have resulted in the video industry not being understood by U.S. capital markets and investors. Kuliu.com, the first video website to be listed in the United States, faces the risk of delisting from Nasdaq because its stock price has been below US$1 for a long time. Similarly, Youku Tudou, which was once listed in the United States and then delisted, is also not optimistic.

According to the project plan, like most video websites, iQiyi's cost mainly comes from the cost of purchased and homemade content, as well as broadband costs such as network transmission and encoding processing. Iqiyi's current revenue sources are advertising revenue, membership income and copyright distribution, as well as iQiyi's gaming, e-commerce, OTT and movie distribution income.

The company's profit model

data shows that iQiyi's high-cost burning has caused its losses to continue to expand in the past three years. This also affected Baidu, which controls the company. According to Baidu's third-quarter 2015 financial report, Baidu's operating profit was only 2.512 billion yuan, a year-on-year decrease of 35.9%. One of the reasons was the large investment in iQiyi. At the same time, some Baidu insiders once said that in the third quarter of 2015, iQiyi lowered Baidu's operating profit margin by 5.4 percentage points.

However, iQiyi continues to burn money and lose money. After privatization, iQiyi does not have the support of the giants behind Youku Tudou and Tencent Video. iQiyi should indeed consider the issue of blood transfusion before going public.

The iQiyi official responded on the evening of May 24, saying that "'iQiyi Management Purchase Project Plan 'is false information fabricated by some institutions to sell financial products under the name of iQiyi."

Editor: vian